adopting accounting to a changing economy

adopting accounting to a changing economy - Joshua Smith...

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Joshua Smith Accounting Semester Project Bethany Brandt AIS 100 Adopting Accounting to a Changing Economy The business world is constantly evolving and as it becomes more complex, it also becomes more difficult to present the necessary information about a company to stakeholders. The resulting environment is challenging for accountants responsible for this reporting which is essential to the running of the economy. The list of internal and external stakeholders is endless; the importance of making financial statements, the windows into a company’s performance and health, reliable and useful cannot be overstated. It is vital to continually rework accounting methods to these new environments. The last decade has been one marked by extreme market volatility. From the Tech and housing bubbles to the credit crisis; complexities of changing credit costs, derivatives, and irrational exuberance investing are just some of the many factors making this last decade truly unique in history. This uniqueness creates a seemingly impossible task of perfectly reporting financial information about a company. Due to volatility in prices and the importance of valuation in current markets, one of the most important arguments in accounting today, the use of fair value verse cost basis accounting, has been brought to the forefront, both having a significant effect on the reliability and relevance of financial statements. Many advocate fair value accounting, an accounting method that records the value of assets and liabilities at the amount they can be sold or traded for on the market. Fair value accounting can be determined for nearly every asset and liability of a company, even intangibles like contingencies. The fair market value of an asset, real or intangible, would be its estimated market price, how much it could be bought, sold, or traded for on the market. As a result, during the housing bubble fair market accounting would allow many companies to match their assets with higher market prices. The fair value of a liability would be the amount to currently pay it off, the market value of the credit or obligation. For instance, the fair value of a contingent liability like a lawsuit would be the estimated cost of the lawsuit to the company; this would be directly recorded in the financial statements. The
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This note was uploaded on 05/04/2009 for the course ACCT 100 taught by Professor Punke during the Spring '08 term at Wisconsin.

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adopting accounting to a changing economy - Joshua Smith...

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